A new normal? Disclosure rules, investor pressure and a slow economy held back CEO pay

  • Article by: JOHN J. OSLUND and PATRICK KENNEDY , Star Tribune staff writers
  • Updated: June 22, 2011 - 7:43 AM

While there are always exceptions, average total pay for Minnesota CEOs has been flat or falling for three years.

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The highest-paid CEO in the survey is Stephen Hemsley at UnitedHealth Group.

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Mark Twain may have captured the sentiments of Minnesota CEOs on the issue of executive pay.

"All things in moderation," Twain said. "Including moderation."

After falling for two consecutive years, average total pay for Minnesota's 100 highest-paid CEOs came in flat last year at about $946,000.

It took a recession, a slow, halting recovery and a fistful of new legislation to rein in executive pay, especially outsize stock awards, experts say.

But the Star Tribune's 2011 Executive Compensation Report shows that many CEOs still had reasons to smile about their paychecks and cash bonuses. Last year saw a rebound in cash compensation, up 18.5 percent, on average, to $708,271. That's the highest level since 2006.

"Moderation'' and "executive compensation'' are not words that often appear in the same sentence. But at the median, where half the packages are higher and half are lower, compensation for the 100 highest-paid Minnesota CEO has been essentially flat since 2007, before the financial crisis.

"The reason median total pay is flat is that the accumulated weight of proxy disclosure requirements, media scrutiny, pressure from institutional investors and the lagging economic recovery is pushing down on any proposal to significantly increase executive compensation for execs at publicly traded companies," said V. John Ella, an attorney who specializes in executive compensation at the Minneapolis firm Jackson Lewis.

Stock options and restricted stock, called equity compensation, tend to drive the headline-grabbing paydays of chief executives. But the weak economic recovery has meant fewer opportunities for large equity awards.

Cash compensation tends to rise when other types of pay, notably equity awards, fall. The biggest chunk of change for this year's CEOs came from salary and bonus payments (42 percent), followed by stock options (31 percent), vesting shares (22 percent) and "other" compensation (5 percent).

The highest-paid CEO in the survey, Stephen Hemsley at UnitedHealth Group, is the exception that proves the rule. Hemsley, who tops our list for the second consecutive year, received $48.8 million in 2010, about half of the $101.96 million he took home in 2009.

But Hemsley's paydays for both years are the result of one-time gains from stock options he was granted 10 years ago -- a period when executive compensation practices were far more generous overall and particularly so at UnitedHealth Group.

Hemsley's stock option gains of $43.5 million in 2010 accounts for nearly half of the $102.3 million in total stock gains realized by all 100 CEOs on this year's list. Separately, Hemsley got a $3.4 million bonus for 2010, a year when the company's total return to shareholders rose almost 20 percent.

'Compensation fatigue'

Regulators have increasingly required companies to disclose and justify their executive compensation payments and practices.

"The decisions around base salary, bonus and stock grants are much more in alignment and much more scrutinized now" than they were a decade ago, said Don Lindner, executive compensation practice leader for WorldatWork, a pay tracking firm based in Scottsdale, Ariz. "I think what we are seeing is more thoughtful, deliberate pay for performance. And that's the way it's supposed to work."

Robert Kennedy, a professor in the department of ethics and business at the University of St. Thomas Opus School of Business, also cites what he calls "compensation fatigue" for moderation in executive pay.

Painful memories of deep layoffs, the closing of business units and cuts in pay and benefits for rank-and-file employees are still fresh in the minds of executives.

"I think there has been a reduction in the pressure to keep raising compensation," Kennedy said. "There have been so many tough decisions made at companies ... that there is less eagerness to keep raising executive pay on the part of compensation committees."

Compensation attorney Ella agrees. "I think there has been some sensitivity about not wanting to stick out from the crowd as well as an interest in incentive goals that are very carefully crafted and do not encourage long-term risk,'' Ella said. "I have also noticed an increased awareness on the part of global firms about differences in executive pay from country to country, which may start to exert a flattening effect on pay as well.''

That said, executive compensation packages are designed to reward performance, so if a company does well, the CEO does well. So a strong, rebounding economy will likely be accompanied by rising CEO pay.

Methodology

There are several ways to measure executive compensation, some of which use estimated values of new stock grants.

However, since 1997 the Star Tribune has used a "cash value" recognition method that counts all dollars received in the reporting year, including any gains on the exercise of previously issued stck options.

We don't count new option awards in calculating total pay for two reasons: The reported dollar value is only an estimate required for accounting purposes; and the person typically won't receive any cash value from such awards for years.

The Wall Street Journal reported in its 2011 executive CEO pay survey that total pay increased 11 percent among the 350 companies it reviewed. The Journal changed its methodology for this year's report to include salary, bonus and long-term incentives awarded for the year, including stock and stock options valued at the time of the grant.

The Corporate Library, a nonprofit that also monitors CEO pay, reported that annual compensation has climbed nearly 18 percent at the median in 2010 across the approximately 600 CEOs in its survey. The organization surveys many more large-capitalization companies, where compensation tends to be higher.

Lower on the corporate food chain, average salary increases for rank-and-file hourly and salaried workers in the Midwest rose about 2.5 percent in 2010, up from about 2 percent in 2009.

The raises in 2009 and 2010 are among the smallest yearly bumps in 37 years, according to a WorldatWork survey.

In 2010, salaries for officer-level employees nationally rose just 2.5 percent, the salary tracking firm reported. And among all the companies responding, 20 percent reported officer-level salary budgets were effectively frozen in 2010. That's down from 43 percent in 2009.

Payday highlights

For the second year in a row, 3M Co.'s George Buckley fetched the largest salary. Buckley got $1.72 million in both 2009 and 2010. The 3M chief's total pay was $23.2 million last year, compared with $6.88 million in 2009. Total return to shareholders in 2010 was 7.1 percent.

In all, eight CEOs on the list had base salaries of $1 million or more, the same number as last year.

Among this group, Regis Corp. CEO Paul Finkelstein got the biggest raise: 17.7 percent to $1.421 million. Total return to shareholders of the big hair care chain dropped 9.7 percent.

Fifty-eight of the Minnesota CEOs got raises last year, the same as in 2009. But 17 took salary cuts in 2010 while 25 others got the same salary both years.

Eighty-three CEOs got a bonus last year, up from 78 in 2009. There was, however, a wide spread.

HMN Financial CEO Bradley Krehbiel received $150, the company's customary holiday bonus.

James Cracchiolo of Ameriprise had the largest bonus for the second year in a row. His bonus 2010 increased 21 percent to $9,428,000.

Indeed, 24 of the CEOs earned a bonus of $1 million or more.

Overall, gains from exercised stock options decreased 19.9 percent from $126.6 million in 2009 to $102.3 in 2010.

But most of that decline is the result of one executive: UnitedHealth's Hemsley, whose stock options exercise in 2010 was $43 million. Excluding Hemsley from the year-over-over comparison, stock options gains for the group nearly doubled to $58.6 million over 2009's $29 million. Twenty-nine executives exercised options in 2010 compared with 21 in 2009.

Gains on stock options and vesting shares of restricted stock typically boost executives into the highest-paid ranks, and this year is no exception.

Seven of the top 10 CEOs got there by exercising options. Joining the ranks of the top 10 highest-paid CEOs in 2010 are Douglas Baker Jr. of Ecolab at No. 8 and Richard Davis, chairman and CEO of U.S. Bancorp, at No. 10. Jim Prokopanko, CEO of Mosaic Co., had more than $5 million in vesting shares that landed him at No. 9.

In 1999 -- the last full year of the 1990s bull market -- gains from stock options accounted for 70 percent of total compensation for Minnesota's highest-paid CEOs. Last year, option gains contributed 31 percent.

Forty-two executives got gains from the vesting of restricted stock awards compared with 45 a year ago. Gains from vesting shares jumped to $72.8 million from 2009's $27.1 million.

3M Co. CEO George Buckley topped the vesting shares list with $15.3 million followed by Xcel CEO Richard Kelly ($8 million) and Target CEO Gregg Steinhafel ($5.6 million).

Here's another measure: Forty-nine Minnesota executives took home $1 million or more in total 2010 pay, the same as last year. That contrasts with our record year of 2006 when 66 CEOs took home $1 million or more.

Female CEOs

Six female CEOs made our 2010 list, up from four a year ago. Sally Smith, CEO at Buffalo Wild Wings, ranked highest at No. 34, with $1.966 million in total compensation. Pamela Patsley, CEO of MoneyGram International, came in at No. 41 with $1.7 million. The company relocated its headquarters from St. Louis Park to Dallas last year.

CEO Laura Hamilton of MTS Systems was No. 48 with $1.162 million.

Lorna Nagler, CEO of Christopher & Banks, came in at No. 49 with $1.014 million; she resigned from the struggling women's clothier in October.

Kathleen Iverson, CEO of CyberOptics Corp., ranked No 83 with total pay of $399,000. And Cheryl Beranek of Clearfield Inc. ranked No. 94 with $308,000 in total compensation.

oslund@startribune.com • 612-673-7206 pkennedy@startribune.com • 612-673-7926

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